Israel’s foreign currency market in January 2017

Strengthening of the shekel
against the dollar, in parallel with a weakening of the dollar worldwide.

In January, the shekel strengthened
by about 2 percent against the dollar, while weakening by about 0.3 percent
against the euro.

Against the currencies of Israel's
main trading partners, in terms of the nominal effective exchange rate of the
shekel (i.e., the trade-weighted average shekel exchange rate against those
currencies), the shekel strengthened by about 0.9 percent in January.

Worldwide, the US dollar weakened
markedly against most major currencies in January. The dollar weakened by 2.2
percent against the euro, by 3.2 percent against the Japanese yen, by about 2.8
percent against the Swiss franc, and by about 1.6 percent against the British
pound.

2. Exchange Rate Volatility

A decline in actual volatility of
the exchange rate in contrast with an increase in implied volatility.

The standard deviation of changes in
the shekel-dollar exchange rate, which represents its actual volatility,
declined by about 2.8 percentage points in January, to 4.2 percent at the end
of the month.

The average level of implied
volatility in over the counter shekel-dollar options increased by about 0.1
percentage points, to 7.5 percent at the end of January.

In contrast, the implied volatility in
foreign exchange options in emerging markets declined, to an average of about
11.6 percent, and the implied volatility in foreign exchange options in
advanced economies also declined, to about 10.2 percent at the end of January
(Figure 4).

The implied volatility in foreign
exchange options trading is an indication of expected exchange rate
volatility.

3. The Volume of Trade in the
Foreign Currency Market

Total trading volume remained
unchanged, in parallel with stability in nonresidents’ relative share of total
trading volume.

Total trading volume in foreign
currency in January was about $167 billion, unchanged compared with
December. Average daily trading volume was unchanged, at about $7.9 billion.

The trading volume in spot and
forward transactions (conversions) was about $31 billion in January.
Average daily trading volume in those transactions declined in January by about
7 percent compared with December.

The trading volume in over the
counter foreign currency options (which are not traded on the stock
exchange) totaled about $4.3 billion in January. The average daily trading
volume in those options declined by about 9 percent compared with December, to about
$200 million.

The trading volume of swap
transactions was about $131 billion in January, compared with about $129
billion in December. Average daily trading volume in swap transactions
increased by about 1.5 percent compared with the previous month, to around $6.2
billion.

Nonresidents' share of total trade
(spot and forward transactions, options and swaps) remained stable at about
34.3 percent at the end of January.